Tech (UK) Limited: Management Accounting and Financial Performance

This management accounting report analyzes the financial performance of Tech (UK) Limited, covering various aspects such as cost accounting systems, inventory management, job costing, and the presentation of financial information. It distinguishes between management and financial accounti...Read More

MANAGEMENT ACCOUNTING
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Executive Summary
The reports of management accounting have been prepared on taking the data on monthly basis.
Management accounting involves the devising planning, decision making, and performance
measurement system. This also provides expertise in financial reporting and also assists the
management to implement and formulate the organization's strategy. A brief analysis of different
types of budgets and costing system can be used in any type of the organization has been
discussed. The small business like Tech (UK) Limited the business owner generally focuses on
giving marketing effort. In order to evaluate the decisions, the accounting managers examine the
costs.
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Table of Contents
Introduction......................................................................................................................................4
Task 1.............................................................................................................................................5
A. Explanation of management accounting.................................................................................5
I. Distinguishing the management accounting from financial accounting...............................5
II. Importance of management accounting as a decision-making tool.....................................5
III. Cost accounting system......................................................................................................6
IV. Inventory Management System..........................................................................................7
V. Job Costing System.............................................................................................................7
B. Presentation of Financial information.....................................................................................8
I. Types of managerial accounting reports...............................................................................8
II. Importance of the information to be presented....................................................................9
Task 2...............................................................................................................................................9
Income Statement.........................................................................................................................9
I. Absorption costing methods..................................................................................................9
II. Marginal costing methods..................................................................................................11
Task 3.............................................................................................................................................13
A. Budget advantages and disadvantages..................................................................................13
B. Budget preparation process...................................................................................................14
C. Importance of budget.............................................................................................................14
Task 4.............................................................................................................................................15
Balanced Scorecard approach....................................................................................................15
Conclusion.....................................................................................................................................16
References......................................................................................................................................17
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Introduction
Management accounting is a process of analyzing the business costs and business operations to
prepare the internal financial records, reports and also aids the decisions of the managerial
people. This development of the accounting system helps in terms of achieving the business
goals. Management accounting system measures and defines the financial performance of the
business industries. In this report, a brief analysis on the Tech (UK) Limited has been taken for
financial study. Finally, the balanced scorecard has been recommended for the organization to
make an analysis of the financial health.
Task 1
A. Explanation of management accounting
Management accounting helps in providing the timely statistical and financial information to the
business managers. This system helps to prepare the financial reports and the managers of the
organization will be able to make short-term managerial decisions in day to day activities.
Maintenance of solid accounting practices is essential for the business growth (Andre et al. 2016,
p.150).
I. Distinguishing the management accounting from financial accounting
Managerial accounting is also named as cost or managerial accounting system and that generally
differs from the financial accounting. Management accounting produces the business reports for
the internal stakeholders of the company as opposed to the external stakeholders. The results
derived from the management accounting are termed as periodic reports for the managers and
CEO of the organization. Management accounting system generally includes the details of
organizations cash, generated sales revenue, accounts payables and receivables.
Management accounting and financial accounting generally differs from the information
available inside it in the number of ways. The reports of financial accounting generally based on
the historical data, whereas the management reports are primarily focused on looking forward
(Anelli and Puglisi, 2015, p.409). Financial accounting reports and statements are publicly
reported whereas the management accounting systems are used for internal use only and also
kept confidential in the organization.
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II. Importance of management accounting as a decision-making tool
Small businesses like Tech (UK) Limited managers are facing countless decisions on day to day
activities. Management accounting system generally uses the information from the business
operations in order to produce the reports. These produced business reports provide ongoing
insight into the performance of the business (Avenali et al. 2017, p.130). Labor utilization and
profit margins are some of the business resulted in activities from the end of the management
accounting systems decisions. The managers of the Tech (UK) Limited must have the data-
driven inputs to make valuable decisions. As per the comment of Cooper et al. (2017, p.995), the
decision-making process generally helps the enterprise to achieve higher profitability and to gain
competitive advantages. There are various activities to be performed by the managerial people
using decision-making tool in management accounting.
Relevant cost analysis: management accounting system helps the organization to make
decisions related to what needs to be sold and how to sell the organizational products and
services into the market. This process has been involved in the management accounting. Based
on the decision making the discontinuity and adding the product line into the business operations
also judged and decided.
Making buy analysis: managerial accounting system provides the basic information related to
manufacturing the products. The make and buy analysis determines the most profitable products
selected for the organization.
Utilizing the data:
Management accounting system provides the valuable data for the balanced scorecard, financial
statements projections and budget statements. This in term helps the organization to guide for
future. Based on this information the managers can make decisions to aim for continuous
improvement.
Analyzing activity-based costing techniques:
As per the comment of Flannery (2016, p.16), the activity based business technique determines
the business needs and whom to sell the products. This is a part of management accounting
system that in term helps to make decisions on determining the product line. This helps in
deciding who the potential customers for the business firm are. The less profitability form the
business will allow the managers to take decisions on paying more attention to the advertising
media and promotional channels.
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III. Cost accounting system
As stated by Fürst et al. (2014, p.1440), the cost accounting system is used by the enterprise to
record the production activities using the perpetual inventory system. Cost accounting systems
are generally designed to track the flow of inventory in a continuous manner following the
various stages of production.
Actual Costing
Actual costing system records the product cost based on the actual cost of labor, material and
incurred costs allocated to the firm. This costing system takes a longer time to evaluate the cost
of sold goods and ending inventory as all the actual costs need to compile for study.
Normal Costing
Normal costing technique is used to tally the manufactured products with the actual material
costs and the actual direct labor costs and the manufactured overhead rate based on the
manufacturing overhead. The cost associated with the normal costing is referred to as the product
costs and also used for inventory evaluation and cost of goods sold. The difference is referred as
variance in case there is any presence of difference among the overhead costs actually incurred
to the overhead cost assigned to the products.
Standard Costing
Standard costing is generally related to the manufacturing costs with predetermined material
costs, direct labor cost and manufacturing overhead cost. In case the actual cost varies slightly
significant from the standard cost the variances will be assigned to the cost of sold goods.
IV. Inventory Management System
Inventory management system in an organization tracks available goods through a portion of the
prepared business and from the entire supply chain involved in the operation. This in term covers
warehousing to shipping, production to retail and form the movement of stocks to the market.
The business firm is able to see moving parts from the operation to market through the different
supply chain. Inventory management system acts as a key component in the supply chain and
also facilitates the point of sales. The inventory management system of Tech (UK) Limited
tracks the products volume and also makes aware the enterprise regarding supply chain
management system status.
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V. Job Costing System
Job costing system is a process of accumulating the cost associated with specific products and on
services. Job costing is an accounting system for budget rates and manufacturing overheads. Job
cost record has been produced while taking the special order into account. In case of Tech (UK)
Limited, the job order costing has been used for manufacturing the mobile devices. The job
costing system in Tech (UK) Limited records the document costs in inventory process, finished
goods inventory and cost of sold goods from the enterprise.
B. Presentation of Financial information
I. Types of managerial accounting reports
Managerial accounting reports are the tools which help to analyze the business performance
quantitatively (Weygandt et al. 2015, p.10). Traditional accounting reports are generally
prepared for tax purposes whereas the managerial reporting has been sued for making a
collection of different types of data about the company's operation. Managerial accounting
reports can be following types which will be useful for the Tech (UK) Limited for improving the
financial health.
Budget Report
Using the budget reports the managers are able to analyze the control costs and departments
performance. Estimated budget in a target period of time is generally recorded in this report
based on the actual expenses occurs. This also has been used by the managers to provide an
incentive to their respective employees.
Job cost reports
These reports show expenses incurred on the assigned specific projects. Job cost reports are
matched with the estimated revenue in order to tally the profitability of the job. Higher earning
areas in the firm can be identified through this report. This report also helps in analyzing the
expense occurred while the project is in progress mode. The managers can be able to correct and
rectify the errors and areas of waste occur during the execution before the cost escalates.
Inventory and Manufacturing
Companies like Tech (UK) Limited must use the inventory managerial accounting report for
making the manufacturing process more efficient. These reports include the inventory wastes,
per unit overhead cost and hourly labor costs. The managers are responsible for comparing the
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different assembly lines within the targeted company and also able to analyze the business
process where it needs to be improved.
Accounts Receivable Aging
In order to manage the cash flow of the companies the Tech (UK) Limited must go for
undertaking the accounts receivable aging reports which extend the credit to customers.
Customer’s balances have been broken down into this report via calculating the number of days
owned (Sparks and Bradley, 2017, p.720). The aging report generally includes the invoices
columns of 30 days or 90 days or more time period. Analyzing this report the manager can be
able to pay the balances and also tightens the credit policies. Old debts can be overlooked
following this report analysis.
II. Importance of the information to be presented
The information present in the above report s must be recorded in an understandable manner.
This in terms helps the organization to make analyze the data at any point in time. In case the
managerial get replaced this understandable format helps other managers to get aware about the
information required to run the business process.
Task 2
Income Statement
An income statement is a form of a financial statement that in term reports the company's
financial performance over given period of time. The Tech (UK) Limited has been taken into
consideration in this report for making income statement analysis.
I. Absorption costing methods
As per the comment of Hackett and Hand (2016, p. 340), absorption costing method includes the
overall manufacturing costs like variable cost and fixed cost and the production cost has been
added to operating expenses. In case there is a constant change in variable cost then the total
production cost also gets vary while bringing change in the operational activity. The cost of the
sold good is calculated through adding the direct labor, operating overhead and direct material.
The variable manufacturing cost includes direct labor and direct material.
The production per unit for Tech (UK) Limited has been calculated in below manner.
Production per unit (absorption costing
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method)
Direct materials $8,000
Direct Labor $5,000
Variable overhead $2,000
Fixed overhead $5,000
Total product cost $20,000
Total units produced $2,000
Produced cost per unit $10
Table1: Production Per unit
(Source: Created by Author)
Tech(UK) Ltd
Income Statement ( absorption Method)
For the month ending September
Sales ($1500*35) $52,500
Less: a cost of goods sold ($1500 * 10) 15000
Gross profit $37,500
Operating expenses
fixed $10,000
Variable $7,875
Total expenses $17,875
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Table 2: Income Statement of Tech (UK) Ltd (Absorption Costing Method)
(Source: Created by Author)
The absorption cost method has been calculated the above income statement where the cost of
goods sold is of $15000 and sales per unit has been mentioned as $52500. The incurred gross
profit is of $37500 in the following month. Based on the above calculation the Tech (UK)
Limited has achieved net income of $17875 at the end of the September month.
II. Marginal costing methods
Hill et al. (2018, p.70) stated that if the cost of production has increased by one unit then the
production unit also get an increase. The marginal costing method assumes the annual cost as the
fixed cost that has been calculated under marginal cost. The marginal cost cannot be directly
related to the manufacturing cost as the fixed asset remains idle throughout the year. The total
production cost is calculated as $15000 and the production per unit is $7.5 under the marginal
costing method.
Calculation of Variable cost product per unit
Direct Material $8,000
Direct labor $5,000
Variable overhead $2,000
Total product cost $15,000
Total units produced $2,000
Product cost per unit $7.5
Table 3: Production per unit (Marginal costing Method)
(Source: Created by author)
The marginal costing method contribution of Tech (UK) Limited in the September months is of
$21250. This has been calculated doing subtraction of Total variable cost from sales. The fixed
expenses incurred are of $15225. The net operating income has been calculated as $16025.
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Tech (UK)
Income Statement(Marginal Method)
For the month ending September
Amount $
Sales ($1500*35) 52500
Variable cost
Cost of goods sold
($1500*7.5) $11,250
Selling expenses (1500*15%) $10,000
Total Variable cost $21,250
margin of contribution $31,250
Fixed cost
Fixed overhead $15,000
Selling expenses (1500*15%) 225
Total fixed expenses $15,225
Net operating income $16,025
Table 4: Income Statement (marginal costing method)
(Source: Created by author)
The fixed overhead of $5000 has been calculated under absorption method where it has been
excluded in the marginal costing method. The fixed production expenses have been excluded in
the marginal costing method. From both of the income statements, it has been observed that the
production per unit has been decreased in the marginal costing by 2.5 which is calculated as $10-
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$7.5 compared to absorption costing. The net operating income also varied from $17875 to
$16025.
Absorption costing method has been recommended for Tech (UK) Limited for preparing the
annual income statement. In the inventory, the fixed cost can be carry forwarded as it remains
idle throughout the month.
Task 3
A. Budget advantages and disadvantages
Static budget
The static budget remains unchanged after changing the input units of the budget. A constant
drop in the sales may not impact the budget allocation and rise also may not have any impact.
Advantage:
 Consistency
The bills of the Tech (UK) Limited has been planned to be paid in time.
Disadvantage:
 Market stagnation not considered into account.
Cash Flow Budget
This budget manages working capital of enterprises.
Advantage:
 Ensures cash inflow timely and regularly.
Disadvantage:
 Inaccuracy in estimation.
Financial Budget
Ensures right type funds are available at the time of requirement.
Advantage:
 Evaluates firm’s performance.
Disadvantage:
 Time-consuming
Operating budget
Involves the cost related to the various operating activities of the business firms.
Advantage:
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 Flexibility
Disadvantage:
 Complications in tax payments.
Master Budget
This includes allocation of funds to different activities.
Advantage:
 Gives overall view of loss and profit
Disadvantage:
 Urination difficulties.
B. Budget preparation process
In order to prepare the budget for the Tech (UK) Limited determination of pricing and costing
system play main role. The cost of the budget is determined by the allocated manager in the
organization (Sokolov and Bikmukhametova, 2016, p.115). Involvement of funding agency
generally depends on the service type, competition and number of services available from Tech
(UK) Limited. Following the cost-plus pricing, the company is able to set the product price.
Competitive tender pricing has been followed when the price gets higher than the normal costs.
C. Importance of budget
Budget generally helps in avoiding the failure and also ensures the success of the business firm.
Adhering budgetary guidelines the Tech (UK) Limited can be able to identify the objectives and
organizational goals. The responsibilities and operations of the organizations are generally
divided among the different managers and segments. Budget measures the actual performance
and also acts as a tool of coordination. The Tech (UK) Limited can be able to reduce the resource
wastes using the process. Planning and controlling of various activities are done through the
budget tool.
Task 4
In order to overcome the financial loss of £ 1.5 million the Tech (UK) Limited has recommended
following the balanced scorecard method. Balanced scorecard method usages help the
organization to overcome financial problems in further years.
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Balanced Scorecard approach
The balanced scorecard is a kind of performance measurement tool that is used by the managers
and the business executives to monitor results of the actions and also executes the organizational
activities. As per the comment of Rogoff (2015, p.100), the balanced scorecard provides the
summary of organizational performance and also includes the key performance indicators in
below mentioned four major areas. The balanced scorecard has been used for the organization to
evaluate the strategic measures and in addition to the financial measures to get the balanced
performance view.
Financial perspectives:
The Tech (UK) Limited must focus on enhancing the financial health of the organization. The
past financial decisions must be evaluated thoroughly and the flaws need to be identified with
utmost priority. The financial factors like cash flow, net income, revenue, expenses and asset
values must be followed by the organization in a balanced way. The financial loss occurs due to
misalign of the financial factors.
Internal process perspectives:
Resource management is one of the basic success factors for the organization. The Tech (Uk)
Limited must utilize the available resources of cent percent also needs to minimize the resource
wastes. Inventory turnover rates, quality control and order fulfillment must be done in a timely
manner. The Tech (UK) Limited must introduce the concept of the balancing the resources at
first,
Customer perspectives:
Customer satisfaction plays a crucial role in the consumer dependent business. The compositions
are very high in the Mobile industry. Customer acquisition needs to be done through launching
innovative products into the market (Schwittay, 2014, p.400). The market share increase through
increasing the prospective consumer's satisfaction. In order to overcome the issues, the company
must undergo on expanding the brand strength.
Learning or growth perspectives:
Human resource management plays the crucial role in running businesses. Tech (UK) Limited
must make necessary steps to increase the employee's retention. Employee education leads to
successful management of the organizational policies and procedures (Shahin et al. 2014, p.
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300). In order to empower the employee training and development courses and classes must be
accessed in the regular time period.
Figure 1: Balanced Score Card
(Source: Shahin et al. 2014, p. 300)
Conclusion
The financial performance of the organization is generally assessed by analyzing the summary of
revenue and expenses incurred in the business process through operating as well as non operating
activities. In this report, a brief analysis of the income statement of Tech (UK) Limited has been
considered into account. Marginal costing method and absorption costing methods have been
analyzed in this paper and one among them absorption costing method has been recommended
for the Tech (UK) Limited. Balanced scorecard and its functionality have been analyzed in the
report and following this in the operational sector the organization can be able to overcome the
financial losses.
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